Developments this week
With increasing violence and tensions spreading across the Middle East, and with deepening economic problems across most OECD countries and even China, oil prices are caught between two opposing forces. Thus far this week there has been little change in NY oil with prices oscillating around $97 a barrel and closing on a weak note Wednesday at $96.17. In London where traders are closer to the Eurozone crisis, oil has been trading around $107 a barrel, $8 below the recent high of $115 set in early November.
The weekly US stocks report once again showed what has become something of a pattern of late. Crude inventories down — this time by 6.2 million barrels; gasoline inventories up – by 4.5 million barrels; and distillate inventories down by 800,000 barrels. While total oil consumption in the US during the last four weeks has been running a tad below last year, gasoline consumption is down by 4 percent but distillate and jet fuel consumption are up by 5.7 and 3.4 percent respectively.
Evidence continues to accumulate that 2012 will be a bad year for the global economy. The US seems unable to make any progress on settling its debt crisis and evidence continues to grow that an economic recovery will not happen. In Europe the problems of Greece and Italy are spreading to other Eurozone members including France and even Germany. Forecasts of an EU recession just ahead abound. Even the Chinese, who are supposed to grow their GDP by 8.5 percent next year, are starting to report economic troubles. All this seems to be saying that the official forecasts of increasing demand for oil next year may not happen.
The move by the Western powers to sanction Iran for its refusal to be more open about its nuclear programs is picking up steam. The US, UK, Canada, and several EU countries are targeting Iran’s central bank and oil industry in an effort to bring so much pressure on Tehran that it will eventually change its ways – or its government. As long as Russia and China continue to back Tehran, at least at the UN, this could be a long, drawn out process. The danger of course is that the new sanctions will actually keep some Iranian oil from reaching markets in which case prices could be higher. There is also room for hostilities to emerge from miscalculations in this situation, in which case oil prices would likely be a lot higher.
The Saudis formalized this week something they have been saying for a long time. The Kingdom is slowing its investment programs and will not attempt to raise its production capacity to the fabled 15 million b/d by the end of the decade. Riyadh says that there is no longer any need to increase its capacity further as there will be sufficient tight oil produced from shale deposits in coming years to cover increasing demand. Some observers, however, believe that the Saudis will have trouble producing 10 million b/d in coming years as their older fields are depleted and it will take all the investment they can muster just to stay even.
Other observers note that the Saudis’ main policy objective is to retain power for the royal family in the midst of popular uprisings all aroaround them. To accomplish this will take large increases in social programs in coming years.